December Stock Market Brief, Avalanche of European Debt 2013

A market giving mixed signals:
The stock market had been basically playing a waiting game since the American presidential election with a tug of war going on between buyers and sellers but now the momentum is definitely moving with the bulls. By all accounts this rally should remain, notwithstanding any shock from Congress and the fiscal negotiators from the Whitehouse. The sooner these budget issues are put to bed the better. Either way, fiscal cliff or no fiscal cliff, the end result will be the same. There has to be some budget cuts and some raising of taxes (the ratings of the American dollar demand it) so I really do wish they would get on with the job of work at hand and cool the dramatics.

The action demanded by American and European budgetary arithmetic is deflationary
all-round yet the market is still positive. Thus while there is no fundamental reason for bullish price action one cannot fight the market. It remains to be seen whether the rally is sustainable.

The Dow Transports held at the crucial 4900 level after the election results and if the 5350 level is broken to the upside it will be a very bullish technical signal. It will mean this important leading index has pierced up out of a 12 month trading range. This range formed a "line" in Dow parlance. The longer the duration of the "line" the more technically important any breakout.

The strength of both the Dow Transports and the Dow Industrials is surprising to me given that quite a few stocks are below their 200 daily moving averages (DMA), in addition significant DMA have become points of resistance rather than support for many equities. These technical characteristics are indicative of a bear market so it remains to be seen whether this bull really has legs. To show what I mean here are a few examples: BIDU, BBBY, MSFT, DLTR and DG.

An avalanche of European debt rolling over in 2013:
"One European issue you don't hear about a lot is the massive amount of debt, both public and private, that will roll over (i.e. need to be refinanced) in the next few years. In 2013 nearly $1.2 trillion of European government bonds will need to be refinanced. A few weeks ago, in a CNBC interview, CEO of money management giant Blackrock Larry Fink, hinted that his firm's clients, typically large institutions, had very little interest in buying those bonds — especially those issued by downtrodden European Union members such as Spain and Italy. Worse still is the mountain of debt refinancing European companies will need. About $4.2 trillion worth of corporate bonds will mature through 2016, according to Standard and Poor's ratings services. In 2012 alone roughly a half trillion came due. But the real tidal wave rolls over the next two years, with $1.03 trillion for 2013 and $1.28 trillion in 2014. If these numbers aren't scary enough, then consider financial companies (i.e. banks) owe about 78% of this debt. These companies are the primary sources of liquidity to keep the commercial gears of the EU greased. If investors are hesitant to buy European sovereign debt, then the mere idea of buying European corporate debt — especially for financial companies — would send them running for the hills."

From the above report by the Jutia Group the new European Stability Mechanism (ESM) is going to have a very busy year in 2013. The ink is barely dry on recent plans when it is now apparent that the agreed 500 billion Euro targeted to be "raised" will not be sufficient to meet requirements particularly as it looks increasingly likely that Italy will go into "default" like Spain, Portugal, Greece and Ireland.

Any indication that the 27 Euroland countries are going to drag their feet in this regard will more than likely throw the Euro into its biggest crisis yet. The reason for this growing disillusion is that it is rumored the fund will need to "grow" to at least 2 trillion Euros to adequately deal with the Italian problem. It is thought in certain circles that this debt level may be substantial enough to now make the German political establishment finally consider throwing in the towel on the disaster that has become the Euro. I personally don't think they will walk but if France goes the way of Italy that is another issue. I do not think Germany could maintain its premier sovereign debt status in such an eventuality. I think then and only then will the writing be on the wall for the Euro.

Mr. Quigley was born in 1958 in Dublin, Ireland. He holds a Bachelor Degree in Accounting and Management from Trinity College Dublin and is a graduate of the Marketing Institute of Ireland. He commenced investing in the stock market in 1989 in Belmont, California where he lived for 6 years. He has developed the Wealthbuilder investment and trading course over the last two decades as a result of research, study and experience. This system marries fundamental analysis with technical analysis and focuses on momentum, value and pension strategies.

Since 2007 Mr. Quigley has written over 80 articles which have been published on popular web sites based in California, New York, London and Dublin.

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